Late Stage College PlanningFinanc­ing col­lege tuition, fees and expens­es can be daunt­ing.  How­ev­er, tak­ing advan­tage of stu­dent loans may help light­en the finan­cial bur­den.  There are sev­er­al type of loans avail­able, both good and not-so-good.  Pri­mar­i­ly, stu­dents can get access to Fed­er­al stu­dent loans and/or pri­vate stu­dent loans.

Typ­i­cal­ly, Fed­er­al stu­dent loans offer bor­row­ers low­er inter­est rates and have more flex­i­ble repay­ment terms and options than pri­vate loans.  Fed­er­al loans are bor­rowed funds that you must repay with inter­est.  Pri­vate stu­dent loans are non­fed­er­al loans issued by a lender such as a bank or cred­it union.

Fed­er­al Stu­dent Loans

Fed­er­al stu­dent loans are gen­er­al­ly bet­ter for stu­dents.  They typ­i­cal­ly offer ben­e­fits not found in pri­vate loans.  These ben­e­fits include things such as low fixed inter­est rates, income-based repay­ment plans, can­cel­la­tion for cer­tain pro­fes­sion­al jobs and defer­ment (post­pone­ment) options in the event the stu­dent goes back to school.  They also do not require a cred­it check which is required pri­vate insti­tu­tions.

Type of loan Who’s eli­gi­ble Inter­est rate
(2016)
Loan lim­its
yearly/lifetime
Perkins Loans Only the most needy col­lege stu­dents 5% Under­grads: $5,500/$27,500
Grad stu­dents: $8,000/$60,000
Sub­si­dized
Stafford Loans
Deter­mined by Free Appli­ca­tion for Fed­er­al Stu­dent Aid (FAFSA) 4.29% $3,500–$5,000 depend­ing on grade lev­el
Unsub­si­dized
Stafford Loans
Every­one who files a FAFSA 4.29% for under­grads

5.84% for grads

$5,500-$20,500 (less any sub­si­dized amounts received) depends on grade lev­el and depen­den­cy sta­tus
Par­ent PLUS
and Grad­u­ate
Stu­dent PLUS Loans
Those who meet the eli­gi­bil­i­ty require­ments and do not have an adverse cred­it his­to­ry 6.84% Under­grads and grad­u­ate stu­dents: the cost of your college’s annu­al tuition and room and board, minus finan­cial aid

 

State Loans

Anoth­er option is to look to what your state has to offer.  Each state has its own eli­gi­bil­i­ty require­ments.  Some states require that a stu­dent attend col­lege in that states while oth­ers do not.  Typ­i­cal­ly, the inter­est rates on these types of loans are between 4.5% and 8.5%.

Using Your Home Equi­ty

Home equi­ty loans and home equi­ty lines of cred­it are options as well.  A cred­it check is need­ed but the inter­est rates are gen­er­al­ly low for qual­i­fied bor­row­ers.  The amount that is bor­rowed is based on the dif­fer­ence between what the your house is cur­rent­ly worth and how much you’ve already paid on your orig­i­nal loan.  In some cas­es, the inter­est paid on the loan can be tax deductible.

In the same vein, a cash-out refi­nance of an exist­ing mort­gage can pro­vide the funds need­ed to pay for col­lege.  These types of mort­gages can come with fixed, vari­able and adjustable inter­est rates and typ­i­cal­ly offer longer terms of repay­ment than home equi­ty loans.  As with home equi­ty loans, the inter­est paid may be tax deductible.

A word of warn­ing on using a home to pay for your child’s col­lege edu­ca­tion … you are guar­an­tee­ing these loans with your home.  If you can­not make the pay­ments on the loan, the lender can fore­close on the loan and you can lose your home.

401K Loans

This is an option, but not nec­es­sar­i­ly a good option.  Always remem­ber, your child can bor­row for col­lege, but you can­not bor­row for retire­ment.  Most 401k plans have loan pro­vi­sions that, by law, max­i­mize the loan amount to 50% of the vest­ed account bal­ance and it must be repaid with­in five years through pay­roll deduc­tions.  The inter­est rate is set by the plan and is usu­al­ly tied to the prime rate.  Five years is a short peri­od of time.  If you fail to do so, the unpaid bal­ance of the loan is treat­ed as a non-qual­i­fied with­draw­al sub­ject to income tax and a 10% penal­ty.

Pri­vate Stu­dent Loans

Pri­vate stu­dent loans are the loans-of-last-resort.  They typ­i­cal­ly have high­er fees, more accep­tance require­ments, inflex­i­ble pay­ment options and gen­er­al­ly require a cosign­er (e.g. the par­ents who are on the hook to pay for the loan if their child does not).  They are offered to stu­dents by a vari­ety of banks and pri­vate lenders and can car­ry inter­est rates as low as 3% and as high as 12% so be care­ful to choose the most cost effec­tive loan pack­age.

Life Insur­ance Pol­i­cy Cash Val­ue Loans

Whole life, vari­able life and uni­ver­sal life insur­ance poli­cies all have a cash val­ue com­po­nent that can be bor­rowed against.  The cash val­ue is a por­tion of your policy’s death ben­e­fit that has become liq­uid.  The inter­est rates for loans on these types of poli­cies will vary based on the pol­i­cy.  Since the cash val­ue is con­sid­ered to be yours, you decide on when to repay the loan.  There are sev­er­al things to con­sid­er before using this type of loan.  First, if you die with­out hav­ing paid off the loan, the ben­e­fit is reduced by the loan amount.  Sec­ond, if you don’t pay off at a min­i­mum, the inter­est on the loan every year, this inter­est will con­tin­ue to accrue and slow­ly eat away your death ben­e­fit.  At some point, there is no cash left and the pol­i­cy will no longer be in force … even if you con­tin­ue to pay the pre­mi­um.

And Final­ly ….

For par­ents, it’s crit­i­cal to make sure help­ing their child pay the col­lege tab won’t short­change their own home, retire­ment sav­ings, or oth­er short- and long-term finan­cial goals.  It’s also impor­tant to only take out loans that are need­ed to pay for edu­ca­tion-relat­ed costs.  Even though you and/or your child may qual­i­fy for more, the total loan will need to be paid back with inter­est.  Tak­ing out more than can be repaid may have con­se­quences for many years after your child has grad­u­at­ed from col­lege.

Know your options.  Talk to your trust­ed finan­cial advi­sor to bet­ter under­stand the options avail­able and how your deci­sion could affect your future finan­cial inde­pen­dence.  You can also con­tact Mack­ey Advi­sors, the Pros­per­i­ty Peo­ple.  Our clients get the clar­i­ty to make bet­ter deci­sions and the con­fi­dence to take action.